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Consultancy Formula for Fees

Consultancy Formula for Fees

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Published by Ken Marshall
A simple formula to help freelance consultants charge the most appropriate fee for their requirements.
A simple formula to help freelance consultants charge the most appropriate fee for their requirements.

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Published by: Ken Marshall on Jun 30, 2009
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09/03/2010

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Setting your Fees for Private Practice
Your fees must do four things:
· They must provide you with a personal income appropriate to your skills,knowledge and experience.· They must meet
all
the costs of running your business.· They must provide a surplus, or profit, which will enable you to invest in yourbusiness and allow it to grow in size, services and quality; and to recompenseyou, the owner, for the risk that you are taking with your resources.· They must enable you to compete effectively in your chosen market.Let's start close to home with your personal income.Make a cool assessment of what your skills, knowledge and experience wouldbring you in the marketplace as an employee. Avoid any tendency to be modest.You are presumably good at what you do or you would not be offering yourself toclients. What is more, you have to build the client's confidence in using you andthat means that you need to appear to be the kind of person who can commandhigh earnings. Think for the moment only in terms of salary. Keep it simple.Let me assume that you are worth £50,000 a year for the sake of example. Youwould expect to be paid, if you were in employment, for working days, high daysand holidays. That is, you would expect to be paid for 261 days each year. (You donot usually get paid for weekends and 365 less 104 Saturday and Sundays comesto 261).Divide £50,000 by 261 and you get £191.50 per day. That is your
labour rate.
Of course, you are probably worth a great deal more than £50,000 a year. I am justusing simple figures for the sake of example.
Step One 
Forecast the days you expect to be able to sell, on average, each month. Try not tobe overly optimistic or you will fail to cover your costs fully. On the other hand, if you are unduly pessimistic will make your forecast a self-fulfilling prophecy byestablishing an unrealistically high daily rate.My guesstimate of what you might reasonably aim for is 12 days each month. That isyou will be billing clients for 12 days of the 20 that are available each month onaverage after fluctuations caused by holidays, variations in the business cycle andother activities that are not directly chargeable.
Step Tw
List and cost all your monthly overheads.
 
Step Three 
Multiply each monthly cost by 12 and add these up to get an annual cost of being inbusiness.
Step Fou
Divide the annual overhead total cost by the number of days that you expect toinvoice to customers. On the basis of my guess, 12 days a month for 12 monthscomes to 144.At this point you have established a daily overhead rate which you can add to yourdaily labour rate to give you a complete cost of being in business and of employingyourself. Before we go the last step, let us develop an example which will both clarifywhat we are doing and raise some important points about what to include.My example will be reasonably comprehensive. That is, it will be, in the words of theinsurance industry, 'of wide scope'. Your categories and the figures which you put toeach must be as specific and accurate as forecasting allows.As a total aside, my favourite definition of forecasting is one I heard from DavidMyddleton:
'Forecasting is the art of stating what would have happened if what did happendidn't happen.'
Having got that off my chest, now for our example. Again, don't let the simplenumbers sidetrack you - it's the principle which is important, and the principle is thatthe client pays for everything, but what they pay is fair and above board.
OVERHEADSItem Monthly Cost £ Annual Cost £Secretary 1,000 12,000 aOffice rent 250 3,000 bTelephone 100 1,200Postage 65 780Personnel benefits 40 480 cEquipment 25 300Stationery 12 144
Marketing 
Personnel (5 days) 958 11,496 dDirect 500 6,000Practice management (5 days) 958 11,496Dues and subscriptions 12 144Automotive 345 4,140Insurance 26 312Accounting and legal 225 2,700Miscellaneous 200 2,400 e
Totals 4,716 56,592
 
Notes:
a) If you charge any part of secretarial assistance directly to the client as anexpense, you deduct that part from your overhead. The rule remains, 'theclient always pays - but only once'.b) A proper, locally accurate office rent should be included even if you work fromhome. You may wish to compare your performance with others so you need tocompare like with like, and you may need to rent an office one day. When youdo, you do not want to have to put up your fees. Clients notice such things.c) You are entitled to whatever personnel benefits you would expect to enjoy if employed (health insurance and personal pension plans etc).d) In case you have been wondering, this is where you cover the differencebetween billing clients for 144 days and paying your wages for 261 days. Theshortfall is 117 days – In round figures 10 days a month. The other five arecharged under 'practice management'.e)
 
I hate to see 'miscellaneous' in accounts, but it is useful for bringing togetherall the odds and ends and other things such as meals when traveling and travelcosts that cannot be directly charged to the client as expenses.On completion of this exercise we have an annual overhead of £56,592 which wedivide by the days we expect to invoice, 144.This gives us:Labour rate £191.50Overhead £393.00
Total cost £584.50
We are almost there. All that remains is to add our profit margin, but how much?I can offer a rough guide based on experience. Most consultancies look to earn aprofit of 15 to 25 per cent, and coincidentally or not, it seems to be closer to 15 percent when interest rates are low, and nearer to 25 per cent when rates are high. (If you are borrowing in order to trade, you will not forget to add the monthly interestpaid into your overheads, will you?)So let us go for the upper limit:
Total cost of doing business £ 584.50Profit @ 25% £ 146.125Total £ 730.625
But
£730.625
is an awkward figure to use. So we are likely to round up a little andend up with:
Daily charge-out or fee rate of: £735.00Assuming an 8 hour day giving an hourly fee rate of: £ 91.875(Rounded up to £92.00)

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